Fintotal News Analysis | IRFC Tax Free Bonds Issue- January 2013. What is it all about?
IRFC Tax Free Bonds Issue- January 2013. What is it all about?
Ruby Jacob, 08 Jan 2013

It is Indian Railway Finance Corporation's turn to raise funds via tax-free bonds and this issue will be open from 21 January 2013 to 29 January 2013.

Why is IRFC issuing bonds?

IRFC finances the Railway Ministry. It raises money from the market to finance requirements of the Indian Railways. Some of the financing is done by issuing tax free bonds. IRFC will raise about Rs 1000 crores in tranche 1 of these series.

Are IRFC bonds safe?

Yes, we are quite comfortable with the rating it has got from the rating agencies. IRFC is a wholly owned company of the government of India.

What are the returns in IRFC bonds?

Coupon rate of  IRFC tax free bonds 2013

10 years bonds- 7.68%

15 years bonds- 7.84%

Interest will be paid on the 15th of October every year. If your application is for less than Rs 10 lacs you come under retail category. The minimum application amount is Rs 5000 and the face value of each bond is Rs 1000.

Can NRIs apply for these bonds?

Yes, NRIs can apply for these bonds on repatriation or non-repatriation basis.

How to apply for IRFC Bonds?

Application of IRFC bonds can be made in both physical and demat form. Application can also be made in ASBA or non-ASBA mode.

Applications must be made only in the prescribed Application Form. You can download the forms or apply online through any of the lead managers SBI Capital Markets, A K Capital Services, Enam Securities Pvt, ICICI Securities or Kotak Mahindra Capital.

What is tax free in IRFC bonds?

Here is where you need to pay good attention. Firstly it has nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like the one you got last year. Hence do not fall for this trap.

Now, what is tax free? Income is taxable. Similarly interest is treated as income and is taxable. For example one earns interest from his fixed deposits with banks and he needs to pay tax on it. But in the case of these bonds the interest you earn is tax free. The investment itself does not qualify for any rebate only the coupon interest is tax free. But in case you sell the bonds before maturity you need to pay capital gains tax. So you pretty much need to hold till maturity if you really wish to get tax free returns. Also once the bonds are sold by the original buyer they will earn 0.5% lower coupon rate.

Is there any lock in IRFC bonds?

No, though the only way to exit is by way of selling it in the secondary market. These bonds are to be listed on NSE and BSE. But this does not make the bonds any liquid. Tax free bonds are not freely traded on the exchanges. Less volume of traded bonds mean you might not get good value for selling them. And even if you manage to, you'd have to pay capital gains tax.

Is it good to invest in IRFC bonds?

For retail investors, our take: avoid investing in IRFC bonds. The coupon rate of 7.84% may not beat inflation rate in the long term.  You will not be able to use the power of compounding as well. In fact debt mutual funds can do a better job for you. For retirees and senior citizens this may look a reasonably decent option in case they have exhausted the limits of more attractive senior citizen saving schemes.

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